The paradigm shift in welfare needs as much public debate as corruptionIndia is at two critical inflection points. Its administrative practice was corrupt, secretive, hierarchical, arbitrary and overtly centralised. The welfare architecture that went with this state leaked like a sieve, produced all kinds of price and productivity distortions, was captured by the powerful and caught in a rigid bureaucratic logic. The revolt against old administrative practice is now being played out in the open. It has not followed a neat institutional logic, but it has brought us to the point where it is clear that business as usual cannot continue. But we are potentially in game-changing territory on the welfare architecture as well. With the launch of Aadhaar-linked cash transfer schemes, we are putting together the building blocks of another possible but exciting paradigm shift. The paradigm change in welfare needs as much public debate and attention as corruption.

In some ways, the political economy effects of the potential paradigm shift in our welfare architecture could be momentous. We are in a moment of great possibility, but we need to think through exactly what we are doing to build this new architecture very carefully. The design of large-scale welfare systems, once institutionalised, is very difficult to change. It took half a century to get modest healthcare reform in the US. Under the 12th plan, there is going to be unprecedented spending on a healthcare system. But there is no evidence yet that we have the foggiest idea of how to design an incentive-compatible system that will actually yield results. Most institutional debates in healthcare, for example, seem blissfully unaware of complex ground conditions and behavioural issues that need to be taken into account while designing the grand new architecture we are proposing.

The potential of Aadhaar has been discussed more. There are legitimate concerns over privacy that still need to be addressed. But the case for moving towards cash transfers is quite compelling. In moral terms, it gives citizens the autonomy to exercise the kind of subtle choice they need to cope with varying and difficult circumstances. There is an obtuse paternalism in claims that the poor cannot make relatively rational choices. The idea of millions of women directly receiving cash in their bank accounts is an enticing and empowering one. The practical case is also quite compelling. It would be a little Panglossian to argue that Aadhaar will eliminate all corruption. But there is no doubt that it has the potential to remove a lot of intermediaries as far as citizens are concerned. In the case of fertiliser and fuel subsidies, it could liberate us from the worst distortions in pricing and the sheer criminality the current system produces.

There are important issues of technical detail in assessing the promise of this paradigm shift now under way. But there are some puzzles about the way in which the political establishment is framing the shift to a new welfare paradigm. First, sections of the establishment seem to think that Aadhaar allows us to bypass the need to build capacity in the state, as if this were one technological solution to a human organisation problem. In fact, the opposite is true. Over the course of its development, Aadhaar will require an even more sophisticated state. There is sophistication in the Aadhaar team, but unless that percolates into all other parts of the bureaucracy we will end up with the same dysfunctional system with a layer of technology. I suspect some of the luke-warmness to the potential of Aadhaar comes from this thought. For years we have, justifiably, been fed the idea of state failure. To turn around and then ask citizens to trust the state with something potentially as game-changing as Aadhaar is still a leap of faith for most. Aadhaar can be a catalyst for state reform. But there has to be more evidence that these changes in the other parts of the state are indeed being catalysed. The rot of the old bureaucracy still casts a shadow over any promise Aadhaar might have.

Second, there is the issue of political framing. The problem with the UPA is that it thinks it can have everything. Hopefully, the fiscal crisis will jolt it out of its stupor and force it to make some choices. So on the one hand, it has to be credited for going down this path of building a new architecture. On the other hand, a lot of its most visible political commitments smack so much of the old, ossified paradigm that you are not sure which way it will eventually turn. The issue of PDS is a complicated one. In part, the complication comes from the uneven development geography of India. In some areas, potential starvation is still an issue; while in most of India the debate now has to shift to nutrition rather than starvation. There is a possibility that the supply response to potential spending in cash may indeed vary. So it is possible that we may need a modest PDS even with cash transfers. But what is clear is that the proposed food security bill is a travesty that promises the worst of both possible worlds. It delivers less than what many states are already delivering; at the same time, its logic is completely at odds with the new supple and flexible architectures that are now becoming a possibility. So Aadhaar, if implemented well, signals the possibility of a 21st century welfare state. The food security bill is a throwback to the 1970s, with all the distortions and rigidities of the old system. Which signal should we pick up?

Finally there is the uncertain political economy. Much has been made of the literature that suggests that cash transfers in Latin America favoured incumbents. Depending on the timing and context, cash transfers can have electoral consequences. But apart from one shot effects, we do not yet know enough about the dynamic political effects of a cash-based welfare regime. Current subsidies have been hugely distortionary. But they were under limits induced by the fear of inflation. Because delivery was relatively hard and ineffective, political mileage was more limited. But with an effective cash based system, the temptation to run ahead of fiscal sustainability and productivity may be even greater.

A less distortionary, more effective and autonomy-inducing welfare state is possible. But we need to attend to it with more diligence. There is no stopping India, if it can use this inflection on accountability and welfare to do away with the old regime and usher in a new.